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Comment: ICBC plan puts insurance system at risk

Speeding tickets shouldn't affect how much you pay in premiums

For 39 years, I taught actuarial science at the University of Waterloo.

I often referred to Waterloo county's significant Mennonite community in my introductory lectures on insurance because security through insurance is built on a similar foundation to security in the Mennonite community; namely, collective risk-sharing.

If a Mennonite barn burns down, taking with it 40 milking cows, how does the community respond? Within a few days, neighbouring farmers (let's say 39) and their families gather to rebuild the barn.

But each neighbour also brings one milking cow. By the end of the day, the Mennonite farmer who had the barn fire is virtually whole. He has a new barn and 39 milking cows. The wider community has contributed one day's work and one milking cow, a manageable "loss."

Modern insurance is a formalized mechanism mirroring Mennonite risk-sharing with an insurance company administering the process.

This process depends on a collective view of risk. Hundreds of policyholders sign contracts that state that within their collective group they will make any policyholder who has an unfortunate event whole.

It is this use of the collective that makes insurance work. And it is a miraculous financial instrument.

But, the modern insurance reality is significantly different than the Mennonite collective. Today there is a strongly increased focus on individual equity that erodes the principles of collective risk-sharing.

All insurance institutions are now using a new pricing process called "predictive modelling," and that includes ICBC. Through this process, insurers look for ways to more accurately price insurance for each individual using factors and attributes that are available to them.

In the private sector, many new rate classification variables have emerged. How many times has this policyholder paid a late premium? How long has this policyholder lived at the same address (a sign of stability)? Does your postal code tell the company something about your accident proneness or the probability that your car might be vandalized or stolen? The possibilities are endless.

One company is now offering a discount if you attach a computer-monitoring device to your car. This device will tell the insurer how far you drive in a year. But it can also tell the insurer when you drive, at what speed, how often you apply heavy pressure to your brakes and even your driving destinations (using information from the GPS). This program is currently voluntary, but it does show what other possibilities exist.

This is the background for ICBC wanting to introduce the concept of insurance rates that are strongly influenced by your movingvehicle traffic violations. Get a speeding ticket and your auto rates will rise for three years. ICBC has found a correlation between these traffic violations and the frequency and severity of claims. Thus, to make their pricing as accurate as possible at the individual level, they would like to add this classification variable to their pricing model.

Is this emphasis on individual equity what B.C. drivers want? They buy insurance to avoid anxiety because of a claim, replacing insecurity with economic security.

But even with the existing pricing model, drivers agonize over submitting a claim, knowing their auto insurance rates will rise for many years. Now that angst will extend to something that may be as minor as a traffic ticket, since that will cause their rates to increase for three years. Is this what drivers want?

Would our Mennonite friends report their barn fire if the result were a three-year period of being shunned by the community? Is this truly the way that insurance was meant to operate? Correlations do not prove cause and effect, they are just correlations.

The insurance model is based overwhelmingly on the concept of the collective sharing of risk. If we ignore this principle by emphasizing individual attributes too strongly, we could put the entire insurance system at risk.

Robert Brown taught actuarial science at the University of Waterloo for 39 years and was president of the Canadian Institute of Actuaries in 1989-90. He has now retired to Victoria.